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Published byDwight Reynard Bennett Modified over 7 years ago
How a home loan becomes a security?
Firstly, I choose a house that I would like to buy. Than go to the saving Banks.
Step 1. Buying home loan I tell them the amount of money that I would like to borrow and decide the period that I would paid the money for, Bank checks your credit-profile that they have, then check if you are a prime borrower or subprime borrower.
Step.1-2 Prime borrower Good credit profile – little to no debts(which means that the person paid everything in time) Good income – in order to pay all the debts the person needs to have enough money to pay for debts and other personal stuffs. They pay 20% of the money at the beginning. Lower interest rates.
Step.1-2 Subprime borrower Bad credit profile – little to huge debts (which means that the person couldn’t afford the money on time.) Low income – have some debts left because they did not have enough money. They pay 0% in the beginning Higher interest rates.
Step.2 Saving banks sell bunch of home loan to investment banks. Which means that saving banks are done with the person who bought home loan. Now it is investment banks who cares their money.
Step.2-1 All loans together Investment bank gather all the loans together, which makes security. Rating agencies Investment bank sends the security to rating agencies in order to rate the price. Moreover they rates if the securities are able to sold or not.
Step.2-2 Investors After rating the securities the investors buy the rated security. Insurance company Investors put their securities to insurance company, incase something goes wrong. For example, decrease of housing prices, subprime borrowers cannot afford to pay and other situations.
Why were riskier loans more profitable?
Why?! Riskier loans are more profitable because Riskier loans are usually with subprime borrowers, therefore you can put higher interest rate. Which means that you will get more money if they paid the money back with interest.
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